Risk management architecture: a cross comparison between select Indian and foreign banks - impact of risk based supervision

Abstract

Risk Management, Regulation and Supervision of the Financial Sector in general and the Banking Sector in particular are of paramount importance for the orderly growth of the economy. The oversight of the Banking System has been undergoing a paradigm change in tune with the growth of the Sector as well as the international developments. There is a shift in the Supervisory approach from the conventional transaction based approach to Risk Based Approach on the part of the Regulators worldwide and in India since the 1990?s. The Risk based tools implemented by the Reserve Bank of India for overseeing the working of the Banks include introduction of CAMELS (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Supervision) rating, PCA (Prompt Corrective Action), IRAC (Income Recognition and Asset Classification) Norms, OSMOS (Offsite Surveillance and Monitoring) etc. The present study is undertaken to assess the impact of such Risk Management and Risk Based Supervision measures introduced by the Reserve Bank of India (RBI) in the post Reform period. The main objective of the study is to evaluate the benefits of these measures on the overall working of the Scheduled Commercial Banks (SCBs)belonging to the three Sectors viz., Public Sector, Private Sector and Foreign Banks. The study also made inter- sector cross comparisons to see if the impact is uniform among these sectors and if not, to find out which sector has performed better due to these changes. The study is based on an analysis of a sample of 49 Banks (25 from the Public Sector, 15 from the Private Sector and 9 from the Foreign Banks). The sample was drawn on stratified random sampling basis. Five performance parameters viz., Non-Performing Assets, Net Profit, Net Interest Income, Net Interest Expenses and Operating Expenses were taken. In addition, Capital Adequacy also was studied. The data for the study comprises of secondary data which was collected from the statistics published by the RBI, Indian Banks Association, Government of India.